Real estate remains the asset class

Philip Weiser of international estate agents Carlton International explains why real estate remains the asset class for economic recovery

Once upon a time the prospect of a sun-kissed holiday home was a dream aspiration for legions of overseas buyers. House prices Stateside were on the up and up and life in the greenback economy was good. 2006 marked an abrupt end to the fairy tale: a decades-long binge of fevered price appreciation that we’ll never forget nor probably ever truly comprehend. The global economic downturn has largely been blamed on the US sub-prime mortgage catastrophe and the parallel investment instruments linked to the insurance of such an opaque loan structure, with “property” pilloried as the common denominator, whereas in reality, it has just caught the common cold.

Today there are sizeable areas of the world where real estate has been largely unaffected by the crisis, categories of property, where, resilience to infection remains prevalent, as well as sectors of Real Estate activity which continue to offer unique opportunities for solid, medium and long term investment.

One such opportunity has been identified by the Carlton International Group. Thirty years specialising in prime French Riviera real-estate and the company is well placed to advise investors on attractive investment prospects.

Strong fiscal foundations are however essential to the success of any investment. In the case of France, the country has avoided the subprime debacle largely because the banks have, historically, conditioned loan facilities, not only on property values but above all, on the capacity of the borrower to repay. Repossession laws are complicated and have been expressly designed to protect the home owner.

French banks have also made specific efforts to design terms of lending which avoid litigation with home owners. On the French Riviera, the limited capacity for additional construction has also restricted cheek-by-jowl development seen in many parts of the world. Demand, both for primary and secondary residences has, more often than not, exceeded supply.

In any economic downturn however the failure of banking institutions to provide finance, the threat of unemployment and with a constant bombardment of bad economic news, even the hardiest buyer capable of purchasing, will prefer to hold their financial resources in case of unforeseen circumstances.

The result is a decline in the sales of new development apartments. French legislation obliges developers to provide guarantees of building completion before they are able to contract the sale of any unit, with a view to the future completion of the building. These guarantees are provided by banks and insurance companies. In the event of the failure of the developer to complete construction in accordance with the specific description of the building, the guarantors must ensure completion. It goes without saying that both the developer and the guarantors, wish at all costs to avoid falling into this trap.

Carlton International has identified investment opportunities and negotiated competitive pricing, for bulk purchase of multiple units. Once acquired, completed apartments can be offered for rental and managed by the rental management branch of the company. Returns commonly exceed the norm, rental values having been unaffected by current economic conditions. At any time, or following the termination of residential leases, the apartments can be resold and with the inevitable upturn of real-estate values in due course, will provide considerable capital gain for investors.

Economic conditioning has designed a pattern for future market tendencies: stagnation and the credit crunch imply that developers become unable to acquire land for building. The stagnation period lasts between two and four years. Building permits require six months to one year and subsequent construction takes one to two years until delivery. Clearly, at best, new apartments will become available for occupation between 2014 and 2018. The current stock of unsold apartments will become imperceptibly exhausted by 2016 and demand will exceed supply, resulting one again, in the accompanying increase in property values.

For investors, discount levels will depend on capital advanced and the numbers of units to be acquired. Opportunities for sizable institutional investment are available. Local banking institutions have agreed to assist in investment financing at competitive rates, subject to appropriate guarantees being made. Investors acquiring single units for their personal use may benefit from similar advantages.

Kenichi Watanabe, president of Nomura Holdings, which acquired parts of Lehman Brothers after its collapse, called the current financial crisis a “once in a generation opportunity”.

With regard to Real Estate on the French Riviera, Carlton International thinks so too.

For more information go to: www.carlton-international.com